Today's paper had a write up on 'Unveiling the Retirement Myth' and mentioned it was available for free download (until Aug 31st) ... I took advantage of the invitation and found it quite interesting... It's particularily well suited for those approaching the draw down hase of their investment life cycle... Nothing earth shatteringly new, however I feel comfortable recommending it... If you want a quick overview of his strategy read chapter 41 first 'The Zone Strategy'

BTW to download the book in pdf form (non printable) he does require a name and email address.. Also note this is a Canadian author so there may be a slight difference in some of the terminology...

For those of us in the distribution phase, I'd also recommend Jim Otar's essay, "Lifelong Retirement Income: How to Quantify and Eliminate Luck" (published in Retirement Income Redesigned: Master Plans for Distribution, edited by Harold Evensky & Deena B. Katz).

It's an expensive book so you might want to visit your local library (assuming the library has it). Bob U.

There are some things that count that can't be counted, and some things that can be counted that don't count.

Thanks for the link. I read the article. The 2nd to last paragraph said it all for me;

]Most financial advisors focus on portfolio accumulation rather than distribution of retirement income

I liked the way Otar zoned the clients, and was very clear that those who were carrying unacceptable risk by his definition HAD TO transfer this risk to an insurance company annuity... I've never seen this 'grey area' defined in such a clear cut manner. On the other hand the numbers he used to define each zone (green anyway) were extremely close to what we had calculated for our portfolio... So in my case almost identical results, however the logic behind the numbers was very clearly presented, and supported.

I found the whole book quite useful... a review of math I haven't used for many years, the work through on his site of a hypothetical 55 yr old (sample case)... his comments on MC simulations (Dothemontecarlo... won't like him )... All in all a very down to earth book, well researched work, with no sales pitch applied (outside of buying the book)...

BTW I downloaded and saved the pdf on my computer which is easier and faster to navigate than reading it in a browser, plus it will be there after Aug 31st.

I guess the only negative comment I'd have is that I have concerns regarding his business model... Why would anyone put the entire contents on the web for free? Granted it's 'print proof' however a 12 yr old given this challenge in today’s world would have the problem solved by first recess...

Edit: quote brackets corrected

SB...

Last edited by speedbump101 on Sun Aug 23, 2009 11:26 am, edited 1 time in total.

"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein

I agree with the preface of the book - a very depressing piece. If there is a way out of the premise for the first several hundred pages - all portfolios disburse all their funds a lot sooner than you think almost regardless of the withdrawal rates - I wish he had put it closer to the front.

FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

huskerblue wrote:Okay, so I'm computer challenged. I downloaded the book but now I can't find it on my computer. Advice?

Thanks.

If you are in the window on the OTAR page you need to hit the little "save" icon inside the Acrobat window that is open on your screen. Then you can indicate where to save and do so. Do not go to the save menu in the overall browser window.

RadAudit wrote:I agree with the preface of the book - a very depressing piece. If there is a way out of the premise for the first several hundred pages - all portfolios disburse all their funds a lot sooner than you think almost regardless of the withdrawal rates - I wish he had put it closer to the front.

I don't agree. This piece is generally consistent with the Trinity Study and such planning tools as FireCalc. Those insights have been around for a decade or more. I do think the book appears to be a very interesting discussion in detail of how things work. I wonder if the behavior of TIPS and annuities might deserve even more attention and analysis than given here. The chapters on retirement income distinct from retirement investing seem to be pushed far to the back of the book when they might well have been the starting point for the discussion.

RadAudit wrote:I agree with the preface of the book - a very depressing piece. If there is a way out of the premise for the first several hundred pages - all portfolios disburse all their funds a lot sooner than you think almost regardless of the withdrawal rates - I wish he had put it closer to the front.

I don't agree. This piece is generally consistent with the Trinity Study and such planning tools as FireCalc. Those insights have been around for a decade or more. I do think the book appears to be a very interesting discussion in detail of how things work. I wonder if the behavior of TIPS and annuities might deserve even more attention and analysis than given here. The chapters on retirement income distinct from retirement investing seem to be pushed far to the back of the book when they might well have been the starting point for the discussion.

dbr... right on, as you say his calculations are consistent with what's out there already, however I'd suspect that if you mention "Trinity study" at your next beer call there will be a lot of blank faces staring back, so it's probably very topical for the average (non Boglehead) investor.

I’ve very quickly read most of the book... For those here with moderate knowledge of Bogleism, and studies like Trinity and Kitces I'd suggest that reading it in sequence might not be the best plan of attack... Personally I started at Chapter 41 'The Zone Strategy' and back filled from there... This seemed to work well for my knowledge / interest level.

Interestingly books looking at this phase of investors life cycle are few and far between... I think we will see more and more of them as the leading edge of the boomers (me) get wiped out following the traditional Gaussian retirement planning models... With this in mind it just amazes me that Otar would put this much work into something, and then give it away for free... noble but capitalistically dumb IMHO. He must be solidly green in his personal retirement zone

SB...

Last edited by speedbump101 on Sun Aug 23, 2009 1:20 pm, edited 1 time in total.

"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein

speedbump101 wrote:
I’ve very quickly read most of the book... For those here with moderate familiarity with Bogleism, and studies like Trinity and Kitces I'd suggest that reading it in sequence might not be the best plan of attack... Personally I started at Chapter 41 'The Zone Strategy' and back filled from there... This seemed to work well for my knowledge / interest level.

Hexdump wrote:is that he says to delay purchasing a SPIA as the payments will increase as you age.

Recently, I found that to be not so, and by a significant amount.

For the same amount and same terms, it was $300.00/month less than a year ago.

Does he not also address "luck" in purchasing SPIA's -- in this case luck is the prevailing interest rate when you purchase? It is certainly true that as age increases, actuarial life expectancy decreases and therefore annuity payout goes up, all other factors being the same.

As I commented at first, you cannot make retirement income less complicated than it actually is.

Thanks very much for the tip. I have now saved the book to a pdf file. I suppose that once its on my HDD, that Mr Otar can't reach it. In other words, it should still be there after Aug 31 as you idicated in your post.

I think Otar does address (verbally and graphically) the "luck" factor in purchasing SPIAs (inflation-indexed is what he recommends) if you look at the section entitled, "Pooled Versus Individual Distribution Portfolios," in the link Ron provided.

In the essay, Otar covers a lot of important ground in a very clear, compact, and compelling manner. Bob U.

There are some things that count that can't be counted, and some things that can be counted that don't count.

One of the more interesting bits in the book are the Warning Signs, signs at the start and during distribution that the portfolio (and retiree!) are heading for trouble.

It reminds me of one of the other strategies I've seen discussed, that suggests a portfolio, after experiencing a strong downdraft and at risk of failure, should be augmented by converting some of it to a SPIA.

The Warning Signs that Otar has listed provide a hard threshold for taking such action, as does his Green/Gray/Red Zone model.

(I don't want to reproduce his content. That would be Bad. Just download the PDF and take a look. There is lots of crunchy data and discussion there.)

I got a kick out of his spin on the perennial Boglehead discussion. He appears to favor rebalancing in distribution once every four years, at the end of election years!

It works for me. I've always thought that an infrequent rebalance would be better than the monthly or quarterly styles, if only to let momentum in the marketplace do it's thing. My personal Plan has me using broad (+-25% of target) bands, and rebalancing once a year if those bands are exceeded or my cash/money market 'surge tank' is too low for the next year.

I'll have to play around with his ideas and see how they'd work for my own situation.

speedbump, thanks for the link and everybody reading for the discussion on the book. I imagine J. Otar will also be reading this thread, so thanks to you as well!

Since in the US, social security benefits are essentially a CPI-indexed life-annuity, this means that one can use that to get above the Green Zone into the Gray Zone.

In the end, the message from these 525 pages may boil down to something very simple: The SWR for retirees is about 4%.

From p. 451 on a failure mode:

It makes little difference what asset allocation you use, how diversified your portfolio is, what income strategy you like, how many years of cash buckets you have, whether you have a $10,000 retirement account or are running a $10 billion pension fund, there is only one thing to do: You must export the risk.

In some sense it seems that those folks looking for a magic asset allocation or tricky method of withdrawing assets from their portfolios in order to make their money last are trying to make it more complicated than it is.

Wow, I did not think I would get this much response. I am very pleased. Thank you for all your comments.

Yes, the hosting server is congested somewhat due to the overwhelming response. I apologize for that, but there is not much I can do about it. Here are some hints:

-Please download only once and save it on your computer. Then you can read it at anytime at your convenience.

-Please enter your correct name and address and e mail, in case I have to contact you. Once the book is printed, I will purge all this information. I just need it in case of errata.

-For those who are concerned about my business model: I truly appreciate your concern. However, you don't need to worry about me. I am very deep in the green zone, and the existence of these posts indicate that my "business" plan is working well. The only person who gets upset about these free downloads is my wife, but we have been together for 32 years and she is used to me by now (I hope).

- I have gotten an overwhelming download response, so I changed the rules slightly: The green download is free until end of August 31st, or for the first 5,000 (OK maybe a little more than that) successful downloads. After that it will be for a great sum of $3.99.

-It took me on and off 6 years to complete this book, I hope you all enjoy it.

I recall someone dissing this on the EarlyRetirement forum because if you look at his data (actual returns for various market classes since 1900) you can see that the worst years of the Great Depression and the Great Recession happen to fall in that cycle. That is, his whole conclusion may hinge on one or two election years and just missing one of the worst years would lead to a different conclusion about when to rebalance.

Jim, as a fellow Canadian I'd like to personally thank-you for this terrific book, and apologize for helping facilitate the overloading of your server

There are so many books out there, almost all of them geared to the accumulation phase, while books like yours; ones directing the leading edge of the boomers towards a successful transition to the "decumulation" phase, are almost non existent. Thank-you for taking the road less travelled.

I also see this is your first post here... Welcome to the best financial forum on the web, and I sincerely hope you drop in occasionally and add some sage advice.

SB...

"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein

Welcome to the forum. I'm about 100 pages into the book and find it a good read. As a recovering engineer, I actually like the math.

I downloaded the pdf file and transferred it into a Sony Reader. Some of the tables did not survive the transfer fully intact but the result is still quite readable and more convenient than a computer.

With regard to your discussion of cycles, I will gently and respectfully suggest that we humans have evolved to see and respond to patterns, even when none exist. Completely random activities can produce results that appear to be patterns, but are identifiable as such only in hindsight and therefore are of limited value in making decisions about the future.

Great read, though. Thank you for your insights and for your generosity.

Jim, you are certainly a generous person and thank you for the opportunity to read and take your advice on retirement planning. I plan to retire within the next year and will read your book and hope to find good advice on what to do with my retirement savings. There is so much information that one can easily get lost in trying to develop a plan. What I am looking for is some good common sense approach that is easy to understand and follow.

I just noticed that Jim Otar has linked this thread on his web site...

Welcome linkees to one of the best financial forums on the internet... This forum in conjunction with it's Canadian relative http://www.financialwebring.org/ are the jewels of internet financial forums... Here you will find a 14k plus community of polite, like minded (mostly) and highly knowledgeable, sometimes opinionated members... We also have several well know authors in our ranks... Our common interest is passive investing in the style of Jack Bogle, the founder of Vanguard.

Feel free to sniff around, visit the Wiki and please if you have a question or a comment post away...

SB...

"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein

FYI - I checked this morning and the .pdf download is no longer free, although the paid version is only $3.99. "Missed it by that much."

Due to the overwhelming response, after several thousand free downloads over the weekend, we reached our limit for free preview downloads much sooner than originally planned. I can no longer afford giving away free downloads.

I've read a little bit of it so far, and its very interesting to see how annuities can help outsource some of the risk and improve performance, even in the green zone.

However, I think some caution is in order when considering annuities. In Chapter 33 we see

With a life annuity, both market risks and longevity risks are eliminated. You have
lifelong income, period. Depending on what type of options you choose, inflation risk may also be eliminated.

"Lifelong income, period"... Hmm ... I don't see any discussion at all of the addition of solvency/credit risk in the issuing institution. Although I like the concept of annuities, I am not sure I trust any of the existing financial institutions to be around in 40 years! ( If the evaluation of agency solvency risks are discussed in the book, my apologies, please let me know where to find it. )
Overall though, this looks like a very interesting and welcome contribution to the field.

I'm into it a ways and it is interesting but so far for a guy who is out to show the variability of all things investing and debunking myths, he sure is intent on showing static withdrawal rates to prove his reality for all his average Joe's.

I have yet to meet an old person who, in the face of a declining portfolio, keeps ramping up his withdrawals cause, well, damn it, that's my plan. They will eat more rice and beans at home and less dinners out long before they get to $100,000 left in the kitty but by god, I'm upping my WD's to $74,650 this year!!!

dizzy wrote:I've read a little bit of it so far, and its very interesting to see how annuities can help outsource some of the risk and improve performance, even in the green zone.

However, I think some caution is in order when considering annuities. In Chapter 33 we see

With a life annuity, both market risks and longevity risks are eliminated. You have
lifelong income, period. Depending on what type of options you choose, inflation risk may also be eliminated.

"Lifelong income, period"... Hmm ... I don't see any discussion at all of the addition of solvency/credit risk in the issuing institution. Although I like the concept of annuities, I am not sure I trust any of the existing financial institutions to be around in 40 years! ( If the evaluation of agency solvency risks are discussed in the book, my apologies, please let me know where to find it. )
Overall though, this looks like a very interesting and welcome contribution to the field.

A perspective on this is that if you eschew annuities due to your assumptions about agency risk, you are then leaping from the frying pan into the fire of failing to annuitize. Which is the larger risk if you are in one of those zones where annuitization is the indicated strategy?

I would have thought that the smaller the MRD, the less the impact, IE if the MRD = 000, then there would be no impact, if the MRD = 1, minimal impact, etc.

For example. in my case the MRD = $19.000, and the SWR is about 2%, say $35,000. According to the table, in all the cases, this will have a significant impact on my portfolio.
Since the $19,000 is part of the $35,000, I don't get it.

I would have thought that the smaller the MRD, the less the impact, IE if the MRD = 000, then there would be no impact, if the MRD = 1, minimal impact, etc.

For example. in my case the MRD = $19.000, and the SWR is about 2%, say $35,000. According to the table, in all the cases, this will have a significant impact on my portfolio.
Since the $19,000 is part of the $35,000, I don't get it.

Oh well, maybe after I have a beer or two.

hex

One would assume the problem is paying more taxes than would be theoretically necessary to support actual spent money. MRD in excess of actual withdrawals produces an additional expense item.

I wish he were more clear about how taxation is in account here. When I look at that problem in my budget I look at the planned MRD, estimate the tax cost, and add that cost to my budget for that year. My planned withdrawals are increased to cover that planned expenditure, so I am not so sure his Chapter 20 analysis applies to me.

OTAR puts retirement budgeting in a much later chapter and in there he accounts for taxes by grossing up actual expenses. He does NOT make an allowance for taxes on excess required withdrawals.

One of the reasons I got into a little bit of a snit with Larry Swedroe over the "government owns part of your IRA" is that to me it is much more logical to account for tax deferred taxation as an expense in cash flow rather than as a "correction" to assets. OTAR apparently is thinking of this as a correction factor to assets.

dizzy wrote:I've read a little bit of it so far, and its very interesting to see how annuities can help outsource some of the risk and improve performance, even in the green zone.

However, I think some caution is in order when considering annuities. In Chapter 33 we see

With a life annuity, both market risks and longevity risks are eliminated. You have
lifelong income, period. Depending on what type of options you choose, inflation risk may also be eliminated.

"Lifelong income, period"... Hmm ... I don't see any discussion at all of the addition of solvency/credit risk in the issuing institution. Although I like the concept of annuities, I am not sure I trust any of the existing financial institutions to be around in 40 years! ( If the evaluation of agency solvency risks are discussed in the book, my apologies, please let me know where to find it. )
Overall though, this looks like a very interesting and welcome contribution to the field.

A perspective on this is that if you eschew annuities due to your assumptions about agency risk, you are then leaping from the frying pan into the fire of failing to annuitize. Which is the larger risk if you are in one of those zones where annuitization is the indicated strategy?

Agreed -- in the gray zone you might have no choice but to annuitize. However, in the green zone it is not essential, but could well be beneficial to improving the expected value of your legacy. What's missing for me is a discussion of "what can go wrong" with annuities. Given the state of the financial services industry today, it would scare the living cr$@ out of me to write a check for, say, a third or a half of my net worth and hand it over to one of these fine upstanding institutions in exchange for a 30 or 40 year "promise". What recourse do you have if the issuer goes bankrupt? How well funded are the various state guarantee funds? What are their limits? Since an an annuity is an insurance product and not a security, there is a completely different regulatory and consumer protection regime that is unfamiliar to me, (and probably many other investors).

huskerblue wrote:I'm into it a ways and it is interesting but so far for a guy who is out to show the variability of all things investing and debunking myths, he sure is intent on showing static withdrawal rates to prove his reality for all his average Joe's.

I have yet to meet an old person who, in the face of a declining portfolio, keeps ramping up his withdrawals cause, well, damn it, that's my plan. They will eat more rice and beans at home and less dinners out long before they get to $100,000 left in the kitty but by god, I'm upping my WD's to $74,650 this year!!!

Yep, the majority of semi intelligent people I know would have cut back on their spending long before.

Interesting when backs away from this and tries to look at the big picture here.

-Individuals assess their personal preparedness for risk in retirement by applying a zone overlay. Those in the grey zone must export their risk to a third party insurance company’s annuity.

-Insurance companies on the other hand also ‘zone’ their risk, and have in the past exported this risk to a third party in the form of a swap… Beyond this exactly who and what risk actually exists is left to the ethers in the top floors of Wall St.

Now fast forward to a black swan event, or even a repeat of the markets of 2008, which were arguably not a BS event… The above scenarios are attempts to protect retirees in a prolonged down market.

Fortunately we well ‘diversified’ retiree’s can sleep well knowing our risk outsourcing has provided us with non correlation to stock market events… We can relax knowing we are non-correlated, we are safe… Hummm, haven’t we seen this movie before?

Ok, enough with the fairy tale… We all know now that in a crisis all correlations go to one. In a crisis or perceived crisis, investors blow up, insurance companies blow up, Wall Street firms blow up. Everything blows up with the exception of a couple of safe havens. In recent past the safe haven of choice has been US treasuries, and in the more distant past gold…

I guess there is no real answer here, except that personally the pot of gold at the end of my rainbow doesn’t contain gold at all… It’s filled with health, hope and happiness (ok maybe a little bit of financial happiness too)… We can plan but we can’t guarantee our future. Everyone is looking for the perfect plan; however I’m afraid it doesn’t exist, or it hasn’t been discovered yet. In the end there is only one ‘for certain’ non correlation… death is absolutely, unequivocally uncorrelated with life!

Edit: Does anyone know the half life of recency bias?

Now back to the scotch thread… Scotch and financial planning are definitely correlated!

edit: spelling

SB…

Last edited by speedbump101 on Thu Aug 27, 2009 6:23 pm, edited 1 time in total.

"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein

If your required withdrawals (required by the retiree, not the MRD) is less than the sustainable withdrawal rate, then your portfolio generally continues to increase in value. However, the RMD forces to take you out more than what you need. So, the growth of your portfolio is significantly reduced, whether you are lucky, median or unlucky (Please see charts in Figure 20.5) and you wanted to withdraw only a small amount (less than SWR), compared to if no RMD were to apply to that portfolio.

Depending how deep you are in the red zone, the probability of running out of money holding an investment portfolio generally -at reasonable withdrawal rates- is 40% and higher. (about 45% at 5% initial withdrawal rate, 80% at 6% even with a balanced portfolio)

The risk of an insurance company going under is significantly less than 50%. Furthermore, there is a guaranteed amount ($2,000/month in Canada) which is continued to be paid even if the insurer goes under. So, if the person needs $3000/month to meet his basic shortfall, I buy it from two different insurers.

cotar@rogers.com wrote:If your required withdrawals (required by the retiree, not the MRD) is less than the sustainable withdrawal rate, then your portfolio generally continues to increase in value. However, the RMD forces to take you out more than what you need. So, the growth of your portfolio is significantly reduced, whether you are lucky, median or unlucky (Please see charts in Figure 20.5) and you wanted to withdraw only a small amount (less than SWR), compared to if no RMD were to apply to that portfolio.

Correct me if I'm wrong, but the retiree is not force to spend all of the RMD. So part can pay the taxes, part can fund current expenses and part can be invested in an taxable account. Yes?

Yes, you are right. Just because you do the zone analysis at age 65 does not mean you can then take the same income for the rest of your life.

As I mentioned in Chapters 42-44, you need to review your zones periodically and make necessary adjustments for the income allocation and income levels.

It is just that, if you are in the red zone, all your assets should be allotted to annuity at the first place, so there is not much to review. In the gray zone, annually. In the green zone, annually, but you can be more relaxed about it. At each review, you might be able to adjust income -in theory-, but it actually means adjusting your expenses.

Generally, I find that it works better when your withdrawals are below the sustainable withdrawal rate to start with, and increase withdrawals only after observing that you are "lucky". If your starting withdrawals are higher than SWR to start with, and then later you find out you need to cut back, the history shows that it makes little - if any- difference to the outcome (Chapter 39 / Reduction in Bad Markets / Reduction after Withdrawals become Excessive)

cotar@rogers.com wrote:On the comment about the risk of the insurance company going under:

Depending how deep you are in the red zone, the probability of running out of money holding an investment portfolio generally -at reasonable withdrawal rates- is 40% and higher. (about 45% at 5% initial withdrawal rate, 80% at 6% even with a balanced portfolio)

The risk of an insurance company going under is significantly less than 50%. Furthermore, there is a guaranteed amount ($2,000/month in Canada) which is continued to be paid even if the insurer goes under. So, if the person needs $3000/month to meet his basic shortfall, I buy it from two different insurers.

$2000/month is actually a pretty decent guarantee. Is that a government guarantee (aka socialism ), or a private fund? In CA, the guarantee is only 100k (about $550/month at current US rates). However, these "guarantees" are not government backed, and are actually not guarantees at all. In fact, agents are prohibited from mentioning the guarantee when selling annuities. From the "California Life & Health Insurance Guarantee Association" FAQ:

Why hasn't my agent or company told me more about the Guarantee Association?Insurers and agents are prohibited by state law from using the existence of the Guarantee Association to sell, solicit or induce the purchase of any form of insurance. This is because the protection is limited, and in some cases there is no protection at all. The existence of the Guarantee Association, therefore, is not and should not be a substitute for your prudent selection of an insurance company that is well managed and financially stable.

Ugh...

If there were some sort of limited federal FDIC guarantee for annuities with the full faith and credit of the US that would make them a more attractive tool. As we've seen it only takes a few questionable individuals to bring down some of the largest and highly rated financial institutions.

Assuris pays for the cost of providing coverage for members that fail by maintaining a Liquidity Fund of $100 million and by levying assessments, following the failure, on the continuing Member Companies. All life insurance companies licensed in Canada are required to become members of Assuris and to remain members as long as they have any business in Canada.

There are limits on the amount that may be assessed; however, assessments may continue indefinitely. The current annual maximum is approximately $150 million in addition to a one-time loan assessment limit of approximately $900 million. The maximum assessment rates have been set with regard to maintaining the solvency of continuing companies and exceed the requirements of the Insurance Companies Act.

Assuris' assessment system is designed to raise sufficient funds to deal with insolvencies that have company-specific causes. As an industry funded protection plan, Assuris may not have the capacity to deal with an external event causing an industry-wide failure.

The present value of Assuris' assessment capacity exceeds $4.5 billion, more than 15 times the cost of any insolvency incurred to date."